So I’ve been wanting to make a post about this topic for quite some time but have been unable to find the exact numbers that I wanted to in order to run the math correctly.
My problem? There doesn’t seem to be consistent numbers for what the actual average car payment is in Canada but from what I can gather from multiple sources on YouTube and internet searches it seems fairly safe to say that the average household is dropping right around $500 per month on their vehicle payments.
Shocked? I’m not. We’ve all seen the driveways on our streets and the cars we pull up to at traffic lights, it seems as though most people own at least one vehicle that is within a few years of being new and if you’re like me and have been to a car dealership within the past couple of years you know what these things cost.
So what? People want vehicles and they can make the payment why not? Well here’s the problem with this situation that’s playing out in most neighbourhoods across Canada (and I’m sure world-wide), these households can’t really “afford” these cars.
Today I’d like to have a look at what this vehicle is really costing you and some things you might be able to do to set your future self up for success.
First off.. that loan.
Let us first assume a few things, these are all in line with what one could reasonably expect when purchasing a new car:
Purchase Price: $30,000 – Fairly in line for what most people are driving.
Interest: 3.0% – Could be 0% for some, but could also be much higher especially for younger buyers.
Period: 5 year pay off. Again could be stretched out to 7 but to no benefit of the buyer.
Here is what the first year of that loan looks like:
You can see that we’ve got ourselves into an approximately $540 per month loan and in the first year alone we will end up paying $820 of interest. Now let us fast forward to the end of this term:
So grand total we’ve now paid over $32,000 and $2340 in interest on our car over the 5 year term. Again these numbers probably sound palatable to most readers? I know I myself signed up for a car loan once I got my first “good” job and once I made the number sound small enough by breaking it down into “x” amount per month or bi-weekly and stretched the numbers out over long enough the payments sounded manageable, I even convinced myself that an 8% interest rate on my loan over 7 years was a good idea!
In my personal case the interest paid was going to surpass the $8k mark and I really didn’t care or see the problem with that until I started really hammering down on my budgeting skills and ultimately ended up paying the car off entirely in roughly 1 year after realizing the mistake I had made.
So why is this such a bad idea then if the numbers don’t look THAT bad? Again we’re going to make an assumption here, let’s assume that most people don’t buy this one car and then drive it for the rest of their lives okay? Let’s assume that they either buy a second family car by the end of the 5 year term or, even more commonly they trade it in for a newer car because they deserve it. Okay great. Here’s the math on what that $500 is costing you. Let’s have a look at what $500 invested would yield you over say, your 40 year working life:
There’s nothing outlandish about these assumptions, we’re looking at a 480 month period, or as we said the 40 year working career, we contribute that $500 payment per month instead of spending it on the car and we assume a .5% per month return, or 6% per year – which if we’re going based off people like Dave Ramsey or other investing personalities online we can assume is a lower or safer assumption than the predicted 7-10% returns many speak of.
Notice that “FUTURE VALUE” ? That’s what would be sitting in this investment account had you invested your car payments instead. That’s over $1 Million Dollars.
Your car payment is robbing you of seven figures in retirement or later life use!
But we need a car?
Yes, you’re right. You most likely do need a car for work, school or just to get around town in general but do you need THAT car? The brand new one with the new car smell and the computer that drives it for you? Or would you be just as successful at getting to work in say a $10,000 used vehicle that someone else drove off the lot and depreciated first? These are the types of things we should all be thinking of and weighing the math behind before making these purchases.
Best case scenario is whatever vehicle you do end up buying, do it in cash regardless of the financing %. You will end up buying more car financing than if you have to save your hard earned cash for it and your stomach and brain should stop you buying too much car for your situation if you have to face the reality of walking into the bank and withdrawing thousands of dollars for this purchase.
Thanks for stopping by and taking the time to read this post. This is a topic we feel very passionately about as we have seen so many of our friends and family get saddled with way more debt than they can comfortable live with and these are pains that we ourselves have been through and learned from. We hope you found value in this.
If you have any questions or comments leave them below or over at Instagram @FindependenceCanada and we’ll be sure to get back to you!
FIC.